Feds Ask Court to Enforce Penalty on Energy Trader

(CN) – Federal regulators asked a court to affirm their imposition of $38 million in fines against a defunct Pennsylvania energy firm they say manipulated the electricity market. In a petition filed Wednesday in the Columbus, Ohio federal court, the Federal Energy Regulatory Commission charges Coaltrain Energy LP; its founders, Peter Jones and Shawn Sheehan; and three of the firm’s traders made a large number of so-called “up-to-congestion” trades that were highly unlikely to yield any profit for the sole purpose collecting a disproportionate amount of “marginal loss surplus allocation” payments. In layman terms, an “up-to-congestion” trade is a virtual bid on the day-ahead energy market on congestion and losses between two points. In the case of Coaltrain Energy and the trades that are at issue, these bids were placed on the PJM Energy Market. PJM Interconnection is a regional transmission organization that coordinates the movement of wholesale electricity in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. Its energy market procures electricity to meet consumers’ demands both in real time and in the near term. It includes the sale or purchase of energy in PJM’s Real-Time Energy Market (five minutes) and Day-Ahead Market (one day forward). FERC claims the traders gamed the system to profit from the payments PJM credits to energy traders to compensate them for electricity lost in the form of heat during transmission from the point of delivery to the point of receipt. By employing this unlawful strategy, the government says, Coaltrain incurred moderate losses on its up-to-congestion trades while turning a profit from increased marginal loss payments that otherwise would have been allocated to other market participants. “The Commission found that Respondents defrauded the market by executing a scheme to trade these instruments not to profit based on price spread arbitrage, as the product was designed,” the petition says. “but instead to profit solely or primarily from this credit.” The government says Coaltrain, its founders and employees harmed the market by both diverting credits that should have been paid to others, and by tying up transmission that other market participants could have used for legitimate trading. The commission says in addition to those alleged misdeeds, the firm and its managing partners intentionally misled investigators looking into the trades. It was nearly two years into the investigation before a former Coltrain employee told investigators that the trading data they sought could be easily obtained through the company’s computer security monitoring software program. The software’s recordings not only provided crucial evidence in the investigation, they also demonstrated that Coaltrain and its employees had made false and misleading statements and material omissions to investigators in an attempt to cover up their manipulative trading scheme, the petition says. FERC seeks a $26 million civil penalty against Coaltrain Energy L.P., a $5 million civil penalty against Peter Jones, a $5 million civil penalty against Shawn Sheehan, a $1 million civil penalty against Robert Jones, a $500,000 civil penalty against Jack Wells and a $500,000 civil penalty against Jeff Miller. The Commission also seeks an order requiring Coaltrain, Peter Jones and Shawn Sheehan to disgorge over $4.1 million in unjust profits. The Federal Energy Regulatory Commission is represented in the petition by James Owens, Samuel Backfield and Catherine Collins. The company and the accused founders and employees have has consistently denied any wrong-doing, saying the trading activity targeted by the investigators was entirely legitimate and their activities are being misconstrued by the commission. In a response to the government’s charges the company said it has not violated the Federal Power Act the law under which the proposed fines are being imposed because the legislation prohibits acts designed to deceive counterparties or those that are intended to artificially impact energy price, not the kinds of trades Coaltrain engaged in.